Tesla shares drop after automaker asks suppliers to reduce prices

Palo Alto
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Tesla has reportedly asked suppliers to help the company become profitable, asking for reduced prices for parts in the Model 3 program. Tesla shares are down 6.1 percent Monday.

On Sunday, the Wall Street Journal, reported the California electric car company said it is asking its suppliers for cash back to help it become profitable, according to a memo reviewed by The Wall Street Journal that was sent to a supplier last week.

"Tesla requested the supplier return what it calls a meaningful amount of money of its payments since 2016, according to the memo," writes the WSJ.

While Tesla declined to comment on the report, USA Today noted that it's not that unusual for automakers to "play hardball" with suppliers because it is a never-ending tug-of-war trying to get the best prices for supplies and parts.

However, it was also pointed out that asking suppliers for money back on past work or parts is unusual unless there is a dispute over defects or insufficient performance.

Tesla turns to suppliers to reduce cost and become profitable Electrek.Co (@ElectrekCo) July 23, 2018

Earnings statement on August first

The Model 3 program is smack-dab in the middle of this latest move by Tesla. And it calls into question the state of Tesla's financial position. Not to rehash old news, but the company lost about $2 billion last year and burned through about $3.4 billion in cash after capital investments.

At the end of the first quarter this year, Tesla had about $2.7 billion in cash, according to CNBC.

When Tesla began the Model S and Model X programs, the company was at a starting point, and while asking for price concessions was no big deal, by the time the Model 3 was ready to go into production, Tesla had two successful programs in production and it was talking about much higher volumes for the Model 3.

However, when Model 3 production was hit with delays and problems with the production line itself, this, in turn, caused backlogs with suppliers, especially now that Tesla has achieved the long targeted 5,000 units per week production rate.

Only costs that actually apply to Q3 & beyond will be counted. It would not be correct to apply historical cost savings to current quarter.

But even with all that is going on right now, it will come down to the second quarter earnings statement due out on August 1. Responding to the WSJ story, Tesla CEO Elon Musk responded Tweeting: "Only costs that actually apply to Q3 & beyond will be counted. It would not be correct to apply historical cost savings to current quarter."